All right. Well, good morning, everyone. Thanks for joining us today. I'm Mark Carden, the food retail and food distribution analyst from UBS. We are super excited to have Sprouts with us today. Sprouts is one of the largest natural organic grocers in the United States, operating more than 380 stores across 23 states. We are fortunate to have two of the most knowledgeable people in the industry with us today. First is Jack Sinclair, the company's Chief Executive Officer. Jack joined the company in June of 2019. We also have Chip Molloy, who took over as CFO in September of 2021 after serving on the company's board of directors since 2013. We're gonna run through a number of topics this morning.
If you have any questions during the presentation, please feel free to enter them into the app, and we can try to weave them into the conversation. Before we start, I'm required to read a legal disclaimer. As research analysts, we are required to provide certain disclosures relating to the nature of our own relationship and that of UBS with any company on which we express a view at this meeting today. These disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out, and we can provide them to you after the meeting. With that, let's dive in some topics. To start, we're now a few years into your guys' new strategy. Obviously, the pandemic and inflation have thrown a few curve balls your way.
As you look back and evaluate your progress to date, what are you most satisfied with, and what's been most challenging?
Well, as you say, Mark, it's been a pretty volatile couple of years. The one thing that I was able to do was get the new strategy in place immediately before the pandemic. We've kinda managed to anchor to that strategy. The things that we talked about just before the early 2020 was how could we get much more confidence in our algorithm and our underlying model, and how can we get much more confidence in the target customers that we had. Chip and I kinda got together and talked a lot about how, well, we're not gonna beat Walmart on pricing, we're not gonna win against Amazon on convenience, but what we've got is a unique opportunity to be very targeted to health enthusiastic customers, innovation-seeking customers who are...
There's more of them today than there was five years ago, and there will be more of them in five years than there is today. It's a platform from which to work from. What we were trying to be was trying to be all things to all men, trying to chase every customer down, and it was putting a lot of pressure on the margins and a lot of pressure on the promotional intensity in the business. Unraveling that, and one of the things that I think we've now got to as we emerge out of the pandemic is a much stronger underlying proposition and a much stronger underlying margin. A lot of differentiation in the assortment that we have. Very pleased at the evolution in the assortment.
Very pleased at where we are with regard to our underlying margin, which has given us a lot of strength as a, from a financial point of view, which Chip will talk about in, in a little while. On top of that, we've been very focused on how we improve our fresh foods. We've built two new distribution centers. I'm delighted that we're getting new distribution centers in Colorado, a new distribution center in Orlando, which is a basis upon which we can build more stores and give more access to our proposition going forward. That's creating an underpinning for the business. I'm delighted the fact that we've got a new store format in place, smaller 23,000 sq ft stores as opposed to 30,000+ stores.
That's all the stores that we're building in this year, in 2023, will be in that new format. 2024 and beyond, we're gonna have something like another between 23 and 24, we're gonna have someone off of 70 stores on the market between now and then, which we're very excited about. New stores, new distribution centers, underlying proposition that I think's got a very strong financial strength in the business. A set of a team, we've developed the team pretty strongly over the last couple of years, and I'm very strong that we're very pleased that we've got a team in place that I think gives us a platform for really strong growth going forward.
In terms of kind of think about your overall value proposition, really, Sprouts is historically differentiated on produce. That said, in the environment today, do you think there are still any misconceptions out there just on Sprout's competitive positioning within the category that might not be true? Do you think that people look at the natural organic offering, perceive it to be expensive in the current environment, or has it been pretty status quo on that front?
I think one of the things that's happened is that the conventionals, as the industry calls them, have certainly developed a little bit more in terms of organic, a little bit more in terms of attribute-based products. We're still very differentiated. You know, when I was looking at some data, we've only of our assortment, only 12% of our assortment overlaps with Walmart, which is, you know, we're a pretty strong grocer in the country. There's that differentiation I think is something that's merits a lot of attention. When it comes to the value point, Mark, produce is very important to us, and we think we've got strong differentiated pricing on produce, which was the basis that built the whole business in the first place.
As you go around the rest of the offer within the stores, our vitamin business is very important to us, but it's service based, and it's based on differentiation. When you go into our grocery aisles and our dairy aisles, it's about differentiated product. Good value on those products, but not something you can directly compare with. I think one of the challenges we have is how do we position ourselves in the marketplace, both with the investment community and with our customers, that we're different. When we open a new store, customers come into the store. A lot of customers come into the store, and a big chunk of them, which isn't a surprise to me, go, "This isn't for me." It's where's my Coca-Cola? Where's my cereals? Where's my Tide? Where's my things that I expect in a grocery store?
If you expect that from Sprouts, it's not what you get. What the customers that do love us, love us for our differentiation, for the things that we sell that other people don't sell. We sell more plant-based dairy products than we do dairy-based, dairy products, which I don't know any other grocer in the world that does that. It's just the nature of who we are is the differentiation. It's the value prop is the differentiation that allows us to position in the marketplace. It's hard to have that dialogue when there's a lot of conversation. You're asking one of the challenges in the last couple of years. One of the challenges in dialoguing this in the marketplace is everybody wants to lump us in with grocers and the if grocery goes in this direction, how will Sprouts evolve and develop?
We feel where if we've got a little bit of a moat in place, almost irrespective of what happens on a competitive sense, a promotional sense, even that we've got a moat in place that gives us some defensiveness in almost whatever comes at us going forward.
Okay. Great. kind of building on that a little bit more from the customer standpoint. Historically, you guys have put together some really strong Net Promoter Score among your most frequent shoppers. Getting new ones in the door, though, I know over the course of the past few years has been a bit more of a challenge, particularly in some of your newer markets. How receptive have customers been to your efforts to enhance your marketing message in these markets? What do you think has been most impactful here, and where do you guys still have some room to grow?
Do you want to go with that one now?
Yeah, sure. I think we were slow to react. As we changed the model back in 2019 and 2020, and we got away from the extreme low prices on produce, we had great product. We had great differentiated product. We had a great store experience, but we weren't telling that message as well. The pandemic hit. On the back end, we're beginning to tell that message. We're beginning to enhance the products. We're talking about Sprouts Brand more. We're highlighting it with signage in the stores. We're highlighting with packaging in the stores, but there's still opportunity. In the newer markets like Florida or the Mid-Atlantic, where we don't have brand awareness, getting that message out is really critical for us.
We are, our messaging is becoming more regional so that in those markets is about who we are and what we do. In markets like California and Arizona, it might be a little bit more promotional based, but just to enhance, sort of stimulate demand, but not like deep discounts. Where we are and telling our brand message is what we're trying to do. We're starting to see some traction. Our, our new markets like the Mid-Atlantic and Florida, they started slower, but we're now starting to see comps in those regions that are better than we would have expected as you think about a new store ramp.
That makes sense. You're seeing that even more so in some of the markets that have densified more recently as opposed to some of the ones that you're a little bit more thin in still.
Absolutely.
Yeah.
Yeah. We're encouraged in places like Tampa, where when I first got here, we had, like, two or three stores. It's very hard to get a message so that people know who you are. We're now well north of, I think, 12, 13 stores we've got there now. That critical mass is allowing us to have some strength. Mark, you referenced the Net Promoter Scores. They're really high relative to the industry, relative to our competitors, which is something that gives us a lot of confidence. We ask the question a lot is why do people that love Sprouts so much? It's kind of this is back to what, how we need to communicate going forward. They love our produce, fresh, great pricing. They love the attribute-based, differentiated assortment.
I can buy things at Sprouts that I can't get anywhere else. That's a big plus for them. They like the smaller store format so that they can get in and evolve and the low profile that allows you to see all the way around the store. There's a uniqueness and a differentiation that drives these Net Promoter Scores. The challenge we have is you've got a set of customers who love us and don't come as often as we would like them to do, and a set of customers who should love us that just don't know about us. That then leads to how do we develop our customer engagement going forward.
Customer engagement, part of it is to entice a little bit more spend from our existing customers, is we've got to reengage a DNA of the company, which is sampling and service inside the stores. We had to turn it off a little bit because of the pandemic. A lot of the things that makes a farmer's market special is the engagement you have with customers in store. We think, and we're doing some very specific things on that I think will start to reignite what was great in the company. We're doing a lot of work on are we picking the right media to talk to the right people, and there's some work going on that space, which I'm quite excited about. Then personalization.
In our world, where customers are much more in tune with what's on the labels and why are you buying things and the new products we're bringing in, there's an opportunity for us to get much more personal in our marketing communication. That starts with getting the information. We've only got 13% of our customers who actually give us their data at the moment. If we can expand that a little bit and use that to develop it, we've done some little tactical things on that. As we get into 2024, I'm pretty excited about where that's gonna take us in terms of driving a little bit more traffic and a little bit more spend from the customers that exist with us at the moment.
That's great. In terms of in your earnings calls recently, you've called out some of the trade-down behaviors that you've been seeing, such as reducing the number of produce items, sometimes shifting spend in certain categories like proteins. Have you seen much trade out among your target customers that might be a little bit more sensitive to some of the economic shifts? Do you see this becoming any more of a risk if economic challenges persist? Then what kinds of actions can you take to really keep those customers in the fold?
Talking more broadly about when the economy's under pressure and people's finances are under pressure, will they trade out of Sprouts and go somewhere else? I think the reality of our proposition is if you're a vegetarian and you can get everything you need you're not gonna change your dietary requirements because the economy's under pressure. You might buy a little bit less, you might buy differently, you're going to go where you can get differentiated assortment if that's what you're focused on, and we're communicating with those customers who are differentiated. When you look at what's happened in our e-commerce business, it gives me a lot of confidence that there's a set of customers out there that will not do what you're indicating, trade out.
We're the fastest growing e-commerce business in the United States in grocery. We didn't try to be. The customer took us there through the pandemic, not wanting to be. We didn't say, "Let's go from 2% to 11% of our sales in e-com." Why did it happen? It happened because the customer can only access what we sell from us, and that creates that differentiate. That gives me confidence that our assortment is strong enough to withstand the kind of changes that go on in the economy and people's finances, and that's given us a lot of confidence going forward. Maybe you could talk a little bit about the basket and what's happened in the basket.
Sure. The basket, we talk a lot about losing that extra unit. We don't have a, you know, we're not in a 30 or 40 unit basket. We're sort of in the low double digits from a units per basket perspective because we're a complimentary shop. The number one item that we have the most units is produce. When you think about the customers, first, when we got out of the highly promotional game of 2019, we started to lose that unit. We then went into COVID, so you had the up and the down of the pandemic, so it's hard to get there. As we were coming into 2022, you could see that extra unit of produce was gone.
Now, as you've seen inflation take over since early 2022, what we believe the consumer is doing is they're looking at their basket and they're saying it's less, it's less of a trade down. It's more of a how do I pinch or how do I save? In our basket, the way to do that is take one less item out that happens to be your lowest price point item and the items that you have the most of in your basket. In a way, we believe that the consumer is sort of what we describe as they're managing their household shrink by not buying as much produce. You can see that across the industry. For us, because more than 20% of our sales are in produce, it has been a disproportionate amount.
What does that mean going forward for. We're very focused on it. We've got new leadership in produce. We've got some new strategies in produce. We've doubled down on local produce. We're really getting good there. We're beginning to get the messaging out on produce as well. We're still very priced very well, especially in certain regions like the Southeast, where, you know, very high differentiation between our pricing and the pricing of the biggest competitors. We feel really good about that. Mathematically, you've got that when you went from 12 units to 11 units to now 10 units, as long as those units start to stabilize, which we're beginning to see, that's where in the back half of this year, it's not about gaining the extra unit, it's just less leakage.
We believe just mathematically that's happening for us as you start to see the AUR or the inflation not be as prominent in the back half of this year. We do have a lot of efforts to get that extra unit in the basket. We have contests in the stores. We've got the sampling that Jack is describing, the tasting of the produce, how we're presenting the produce. It's an all-out effort to get that extra unit in the basket.
Interesting. Do you see a risk of that, of customers just being accustomed to maybe being a little more controlling of their own household shrink, as you said earlier, in terms of getting that item back? Or would you expect as, you know, inflation starts to fade, behaviors differ?
I would say that from a financial perspective, we're not betting on getting that unit back. What we're betting on is the working on, and we can see the leakage stopping. From a strategic perspective, we're doing a lot of things to get that unit back.
Yeah.
We think that there are opportunities to do that. We just are not spending against it in a way, getting ahead of it from a spend perspective.
Makes sense.
A big driver for us, household shrink, fresh foods, frozen foods. It's very important to us, it's become much more important to the consumer in this environment. I think there has been a little bit of a switch from very fresh to frozen as people try and protect that household shrink thing. Certainly, we're doubling down on space for frozen. It's working well for us.
Interesting. That's a higher margin category for you guys as well.
Mm-hmm. Yeah.
presumably
Little bit, yeah.
That helps out too. In terms of, just disinflation in general, how would you expect the competitive landscape to change if, you know, we experience some disinflation in the back half of the year? Would you expect price competition to step up, both in conventional and also in natural organic? Then I'll ask a follow up actually after that. Maybe we'll start with Jack.
The starting point of that is will there be some kind of price, dramatic price investment going on across the industry? I think not. I mean, that's the challenge is Kroger and Albertsons and Walmart and is it all gonna create this kind of downward spiral in terms of margins in the grocery sector. They've been pretty public about saying that's not what's gonna happen. I think it unlikely. The way we look at it is even if it did. It wouldn't affect us too much 'cause what they would be fighting on would be things that we don't sell. It would be a battle for who can sell Tide cheapest and who can sell Coca-Cola cheapest, which isn't gonna affect us too much cause you can't buy those things from us.
The challenge for us is how do we make sure that what we're selling is relevant to our target customers going forward in a deflationary world, a disinflationary world, an inflationary world. We look at that context of who we are, and we think it creates a moat for us in the environment that we're working in. There's clearly gonna be some volatility. The volatility of inflation and how to manage inflation from a food retail point of view is unprecedented in the last year. The number of price changes that people have been having to put through, the sheer navigating the scale of the change, it has been unprecedented. Unless you're very old like me and remember it in the 1980s in United Kingdom, it's not really happened to the level that it's happened going forward.
If it switches the other way, there's gonna be a lot of decisions that everyone's gonna have to take, and we'll have to watch it. With regard to natural and organic competition as opposed to conventional pricing or what would happen in that space, we think we've got a pretty strong. There's one obvious competitor that we would kinda look at carefully. Our produce pricing is something we'd be very sensitive to in that. If you started to see a dramatic investment in produce, that's something that we would pay a lot of attention to, and that's probably the only dynamic competitive thing that might happen that we'll be all over. We're in good shape at the moment. We haven't seen anything that worries us so far, we'll be watching that closely as this evolves and develops.
The rest of the proposition, it's about giving. It's about reacting appropriately to value in the marketplace as the price changes. We're very. I think we've got a Chip and I and the team have got a track record now of being pretty consistent on our margins. It's not something we're gonna compromise 'cause that's been the key to creating a business that's got the momentum in it that has at the moment and has the capability and the underlying algorithm to be able to build the kinda stores that we wanna build and get the access we can get. We couldn't have done that. We're not gonna compromise that whatever happens going forward. As I say, we've been pretty confident about that through all the ups and downs of the last few years.
That's the one thing that we can say with a lot of confidence that the margins have been strong, and it's something that we can maintain going forward.
That's an interesting point, and that's a question that, as you can imagine, comes up with investors a lot.
Mm-hmm
is that Sprouts is a very sustainable gross margin relative to some of its peers. What are some of the levers outside of price that you guys think are most impactful in allowing you to sustain a margin when a lot of maybe not direct competitors but other food retailers have seen theirs trending down over time?
Well, a couple things. One is obviously shrink is one. I mean, we've been managing that and doing a really nice job of that. That's helped. It's not gonna move it 100 basis points or 200 basis points, but it's certainly gonna be something that can always help manage it. Then continue to look at cost of goods, like constantly looking at who we're dealing with, who our vendors are, talking to them, and supply chain efficiencies. Like a lot of our stuff comes through distributors, so we're going to the vendors, and then it's going through distributors. The relationship with our distributors and what are the cost of goods that they're getting, and how are we negotiating with the vendors. That's a critical element of it, to make sure that we're continuing to maintain that margin.
Sprouts Brand's gonna be important to us. We've made a load of progress this year. I've been really encouraged by the Sprouts Brand performance, which again creates more of a moat and a differentiation, and it's differentiated Sprouts Brand. It's not commoditized brand in that space. We've been really encouraged by how that's gone. Our mix of private label or Sprouts Brand has gone significantly higher in the last few months even as we've invested in new packaging and new designs and new products. That's gonna help us create that moat, keeping having differentiated assortment. Sprouts was built, and this is long before my time. Sprouts was built on great produce pricing and driving margin from vitamins, bulk, which other people really haven't got in any scale, driving margin by having differentiated grocery assortment.
That whole context doesn't change in the vagaries of how things are changing in other places. The reason the margins were slipping a bit was cause it became very promotional and people were chasing the promotions.
Yeah.
As long as we keep away from that, we've got an underlying mix that is strong enough to sustain. If anything, I think the margin's got more upside than downside going forward.
That's great.
I'm not supposed to say that, apparently.
It slips. We heard you.
Yeah.
No, it's all good.
Flattish.
Last year, I remember we were on the stage in Boston, and Chip, I remember you threw out a term when you're thinking about white space in terms of the Smile of the U.S.
Mm-hmm
And how you'd start off in the Pacific Northwest, go down to the Southwest, across to the South, up the Eastern Seaboard.
Mm-hmm.
You guys have tweaked that a little bit, now you're talking about 1,350 stores across the full country. Big opportunity there. You guys are targeting adding 10% unit growth.
Mm-hmm.
What role would M&A also play within that? I guess related to that question, you've really found a box prototype that works well for you guys. Presumably, some of the potential targets might not have the same size box. How would that impact your thinking of approaching M&A?
Yeah. Well, from an M&A perspective, I think, one, we do have a lot of white space to just grow on our own, whether that's through the Smile or even as we make our way into the Midwest. We've still got some years within the Smile to grow before we have to start thinking about that Midwest. M&A, there's just You know, we could sit back and say, what would be the list of folks that we would potentially wanna be involved with, and the list is pretty small, unless you're really gonna go to a multi-brand or a multi-concept. We just don't believe in where we sit today. We love the brand proposition that we bring to the table. We wanna bring health to more consumers and be able to extend that brand.
It gets very complicated when you try to do that under multi-banners with multi-customer propositions. There's no need to do that for now. When you look to the Midwest, sure, there's players, some players in the Midwest that might fit, privately-owned, whatever. Of course, we'd always look at those, but can you get it done? Don't know.
Sure. Makes sense. maybe a bit related, just when you guys are thinking about this 10% unit growth and you're looking for an ideal location for a Sprouts store, what jumps out?
Really the customers, right? How many customers are there that fit our segmentation? Are we looking for the health enthusiasts, the innovation seekers? What's the density of those? That's gonna be number one. From there, what's the landscape look like from a competitive perspective? Even though we don't think about, you know, sometimes we might wanna be right next to a conventional, but look at just how does the pie get chopped up within that area. We use a tool today, which is pretty new, that we've just implemented last year, but it took us almost a year to really do it well, is we now have a tool that helps us identify not just the trade area, but helps us identify main and main.
It literally helps say, "This is where you wanna be if you can get there." That's ground zero, and you start at ground zero and go from there. It's pretty exciting tool for us.
That's pretty neat. Just in terms of as you think about also with new stores over the long haul, you know, we talked about what you look for in a store as you're placing that store. We've also talked about expansion into new markets. You're also doing a lot of infill. How do you think about the balance between opening stores in infill markets versus opening stores in new markets?
Well, when you start to accelerate your growth to 10%, you know, beggars can't always be choosers, so let's just start with that. We would like a nice balance. We find that in our established markets where we have brand awareness, our stores typically come out of the gate at a higher level, and then they get to maturity quicker. In our unestablished markets or non-established markets, they come out on average slower. It's a balance of how many we can do. We've done the last two years, we've sort of been a 60/40 mix of non-established versus established. This year will be more of a flip of that, 60/40 the other way.
Ideally, if we could do 10% square footage and do a 50/50, the perfect world, that's what we would do because we'd be getting brand awareness at the appropriate clip without diluting the P&L with the newer stores that are in the non-established markets.
To achieve our goals, and, you know, we've talked about 1,300 potential sites around the country. It starts with where are our distribution centers, as long as it's within 250. A lot of those 1,350, we don't have a distribution center 250 miles. That's a big chunk of it. One of the reasons we talked earlier, having distribution centers in Orlando and in Colorado and the new one in California we're just building is gonna create even more opportunities and confidence. As you drive a little bit, the economics get a bit better.
We're taking millions of miles off the road, which is saving us a lot of, you know, putting additional profitability into each of the stores we're opening. The next challenge for us is when do we go, we'll need a distribution center in the Midwest, in the Mid-Atlantic to get after. If we want to get beyond that, we'll be putting some distribution centers in other parts of the country to target that. We don't have to get there till really 2026, 2027 to keep this 10% unit growth going forward. I think we've got much more confidence in our model, and we've got much less risk put into the model by making them smaller and more easy to operate.
That brings up an interesting point. Jack, I know one of your main areas of focus or initially areas of focus when you joined the company was the distribution center footprint and how it wasn't satisfactory for Sprout's growth plans. You guys have obviously done a lot on that front. You're opening the new California distribution center.
Yeah.
You talked about expansion plans. How close are you today to being caught up to where you would like to be just from your existing footprint before, you know, even thinking about?
Well, where we are today. We're probably about 80% to 85% of where we'd want to be. There's still a few outliers. There are stores making us a lot of money that are 400 miles from the odd distribution center. When you know, when you're trying to change that footprint, it takes a little while to do that.
Yeah.
We've certainly made a lot of progress on that. We're in a much better place than we were. It took me a while to realize it, but it's a long way from Atlanta to Naples, and we kind of figured out we better get some. If we're gonna build the store base that we need, we need more capacity and distribution in different places. We're closer than we were, but we've got a bit, particularly in, as I said, in the Mid-Atlantic, we need to get ourselves in a better place there.
Gotcha.
We'll get there.
Another recent development with Q4 results, you guys announced 11 store closures. These were, you know, all identified pre-COVID. Understandably, during the midst of the pandemic, you don't wanna shut them down. What led you to decide that now is the right time? Just from a geographical perspective, how spread out are they? Are they concentrated in any particular markets? Do most of them overlap with another store, so shoppers have another option? How would you think about that?
Well, I'll let you get into more detail, Chip, behind the rationale of it. From a timing point of view. Principally, we had a long conversation when I first joined about stores that weren't delivering what we wanted them to deliver financially, and it was significantly more than what we ended up doing today. This is a one and done thing to catch up. The reason it now is the pandemic's kind of done. I fundamentally believe that this year, certainly February, it feels like it's done.
Yeah.
It's kinda, it would have been wrong to compromise grocery stores, people having access to those health options in those stores over the last couple of years when we certainly would, from a financial point of view, have thought of doing this sooner rather than later. Maybe let you explain the stores, Chip.
Yeah, sure. In 2019 when Jack joined, I was on the board at the time. I stepped in as interim when Jack first joined. We looked at the entire portfolio then, and we would have closed more stores then than we did now. Because we fundamentally have improved the profitability at the store level on average, we have fewer stores that are what I would call, you know, less than optimal.
Sure
Producing negative results. It was just as Jack said, we got past the pandemic. We're at a time, it's the end of the year. We did a lot of work. We looked at every single store in our portfolio, and we came down to we had some that leases would be coming about at some time in the near future. A lot of them were just too big, or they were just bad sites that we had picked in the past, and we just thought this was the time, let's get it behind us, so let's move on. It'll make us a healthier portfolio going forward and a stronger portfolio.
The benefits will get a little, y ou know, they're all negative, that'll take a little drain off the P&L as well as, in many cases, there will be some reverse cannibalization that will sort of make us a better, healthier company going forward. Just to add to that, one person asked today, what have we learned? We did change our real estate model. We think that we're in a much better position to de-risk opening a bad store in the future than we may have been in the past.
Okay. You talked about the decannibalization aspect. When you think about your store growth overall, how impactful is cannibalization just as you expand your-
Well, once. It depends on where they're built.
Sure. Yeah.
It comes back to the density of it's established or not established, it's a pretty small drain. I mean, we burden any new store with cannibalization to see if the economics work.
Sure.
Assuming that that's, you know, we're not just gonna build it. It's, it's immaterial at this moment.
Maybe jumping back to private label, Jack, you touched on it a bit earlier. Sprouts obviously takes a bit of a different approach to use more to supplement your assortment versus creating an entry tier level. Still, you guys saw a really sizable jump in penetration just this past year, going from 16% to 19%. How do you weigh when it's optimal for a product to use the Sprouts Brand versus, you know, more national brand? How do you see private label penetration expansion kind of unfolding over time? Is there a target you guys would like to grow?
Well, we've done a lot of work in Sprouts Brand. We've brought a new team together with a lot of expertise, and I'm very excited about the work they've done. The redesign of the Sprouts Brand is something that is coming alive right across, and it'll be completed by the end of this year, but we're kinda halfway through that now. We think that's made a big impression on it. The key, there's some real opportunities in the categories under Sprouts Brand that differ. What I don't want is commoditized private brand that's just gonna look like what I can buy in Kroger or what I can buy in Walmart. What we're looking for is differ. If we've got, even if it's canned pinto beans, it'll be organic canned pinto beans.
You're covering some of the base requirements of a customer in a, in a grocery shop, but it'll be differentiated in some way, whatever it is. Seasonal is a huge opportunity for us. When we've done a lot of work on trying to develop private label that fits into the seasonal portfolio, that's exciting. Taking the big trends in the marketplace around attribute-based products, we think plant-based ready meals is something that we can own that other people haven't really create.
If you can get products that taste good, and this is the technology's changing quickly, and we've got some real expertise in the team that I think is gonna create some products that will really work for our target customers and try and take the plant-based vegetarian meal space into where everybody wants to eat it, not just people who are focused on that particular dietary need. We're lot of work going on on private, on meals and meal solutions and a lot of work going on on seasonal. On top of that, we've have this in all our stores now, innovation centers, where small brands come to us.
When we see that working, we're working with brands to say, "Is that something we would want to put into a Sprouts Brand as part of an evolution with our buying partners?" I don't want us to be 100% private brand. I don't wanna be a Trader Joe's. I do want us to have that kind of differentiation in Sprouts Brand that creates that loyalty, and it links to the loyalty. It's something we can do well with our personalization and loyalty work, talk to people about the products that we're bringing to the market. W e're making a lot of progress on that space. What the percent, w e're not setting a target for... You know, I worked at Tesco back in the 80s. We had, like, 50% private label or something like that.
We're not trying to chase it down that route. What we are gonna do is continue to make Sprouts Brand so relevant for our target customer that it continues to grow. It's growing about twice the rate of our comp, if our comp's X, private brand's two X at the moment in terms of comp, which is something that's testament to the work that the teams have done.
It's all about stickiness. Can we get the stickiness?
Yeah.
Can we get them to come back? I firmly believe part of that growth is we've redone a lot of the packaging. You know, I'm a finance geek, do I care about packaging? It looks really, really good. It seems to be working, so that's. I'm happy with it.
You're a changed man, Chip.
Branching out. That's great. Another area, so in stocks, you guys have done a lot of work here. How do you think about the longer term benefits from two of your tools, the Perpetual Inventory Computer-Assisted Ordering system and your On-Shelf Availability solution? For those newer to the Sprouts story, can you highlight what these two initiatives entail and how they could impact your P&L?
Yeah.
Sure. On-shelf availability, we launched that last year. It's a tool that allows, in the moment, the stores can see, it's like, "Where are we out of stock?" They can see it through the velocity of sales. It triggers them. We've set up goals around OSA or on-shelf availability for the stores. They're bonused on it. They're going after it. It's really helping the in-stock position. PICAO, which is a perpetual inventory computer-assisted ordering, is really taking the work of our store associates having to determine how to create orders, and it literally is a perpetual inventory. All they need to do at this point is just count. When they count, it knows, right? The system knows what to order. It takes the human element out of it.
I mean, obviously, they have within reason. We're launching that through all of our different categories, and we'll be finished with that this year. That's helping the in-stock position too, so.
Both of those platforms are, they're not reinventing the wheel. You know. Th at's been pretty common in the industry. I think the reality of the natural and organic space that I've stumbled into, if you like, in the last three or four years is this acceptance of mediocrity on in-stock that would not be tolerated at a Walmart or a Target. That change of mentality is part of this and putting the systems in place to make it work and encouraging our partners. There's such a breadth of assortment in a small space, it becomes a difficult challenge to get in-stock as good as you would get in the more conventional kind of good retailers. That's something that we would aspire to as we change our systems, we change the partners we're working with. We're bonusing the store managers now on in-stock.
It's one of the things that as our e-com business has grown, we've seen in-stock. It's very crisp, the in-stock when I got here. The Instacart guys would come and say to us, "Well, I can't get this. I can't get that." The feedback that we were getting from that information really prompted us to say, "We've gotta change the mentality around in-stock in the sector that we're in." That's something that, there's an upside in us. There's a very significant basket upside if we can take our produce our grocery in stock up to our produce in-stock levels, very significant upside, and that's what we're hoping to get over the next year or so.
Gotcha. Another initiative you guys have talked a lot about in recent years is self-checkout. How far along are you on this one? Do you still see much incremental runway on this front?
Go ahead.
We're at 40%.
Of course.
We're at 40%. we'll be at 50% by end of year. All of our new stores have self-checkout. It becomes down to. The other 50% of the portfolio. It's really a math exercise of can you save the labor dollars to put the system in? In some cases, when it's on the edge, we're gonna go for it anyway because it's a better customer experience.
We've had some dialogue about that, is that given the nature of who we are, farmers markets don't have self-checkout in them. If you want that interface with a customer that I talked about earlier, we don't want to lose that. There's clearly some customers who come in and wanna get out with a small basket, wanna get out quickly. And it's helped us. It's certainly helped us in those stores that we've put it in. With cost per labor hour going up, a big chunk of cost and labor at retail is at the front end.
Yeah.
It's helped us in terms of navigate through some of the challenges on cost per labor hour. There's some. The technology's getting a little bit quicker and better and cheaper. One of the challenges we had with self-checkout was when you have a big bulk department, which we have, where people have to write the code down.
Yeah.
We've had to navigate our way through things that maybe other people haven't had to. It's taken a little bit longer than maybe it should have. There's opportunities going forward in that space as well.
Gotcha. Maybe, building onto the labor point there a little bit. You guys have obviously made some big investments in labor over the course of the last few years. How are you thinking about the labor environment heading into 2023 and just the degree of pressure we might see relative to, I guess, what you've seen in recent years?
Well, there's clearly been wage pressure across the industry, which we've. The cost per labor hour has gone up, as I alluded to a little bit earlier. It's stabilizing. What's happened very, very recently in the last two or three months, we're seeing much more applications for hours and jobs in our stores. We're seeing bigger applications for people to work overnight, the night shift, because people are looking for second and third jobs. It's interesting how the economy's just beginning to put pressure on individuals. We're seeing better quality applicants. Our retention rates of retention rates are going down. The applications are going up. The quality of the applications are going up. The labor challenge, I think, is beginning to subside a little bit.
Certainly, that's what we've seen in our business, and it was something we were pretty worried about a year or so ago, is this kind of, as people had a lot of money, they seemed to not need the jobs as much over the last little while.
It's just, Yeah.
Go ahead.
The rate of increases is coming down, so you're not seeing. We'll have, y eah, 2021, they were up substantially. We were able to manage through that, through some other efficiencies. 2022, we're sort of managing through it. Right now, we're working really hard to manage through it. Still some opportunities, we'll still have a tail of that labor that we're managing through. I think we'll do fine. It was part of our guidance for this year, it's starting to stabilize, as Jack said. I don't think you'll see the same kind of rate of increase in 2024 as you've seen the tail. We're seeing the tail of it.
Sure. Time for, I think, a couple more questions. Some tweaks you guys have made to the new store format. Last year, you guys talked about some of the changes that you've made as you've been able to respond to some of the customer behaviors you've been seeing. One that jumps out is e-commerce and how you went from one door to two doors to better handle, you know, traffic flow between the two channels. Within the past year, have you made many other incremental changes to your new store prototype, or have they remained pretty consistent with what you guys had kind of evolved into?
I think the answer would be both to that particular question. We've looked at the V6, which we call it our sixth version of the Sprouts store. Big changes that we made. You alluded to one door. We changed the amount of space that was devoted to non-customer space fairly significantly down. Integrated, made the deli's preparation area integrated with meat and bakery. It significantly changed. We've been happy with that. We've been happy with the e-commerce investment, allowing people to take that door and go straight to the Instacart, people go straight out. I think that's been one of the reasons that's worked quite well for us in new stores. New stores have done well on e-com.
When you take other tweaks we made, we weren't happy where we ended up our wine and beer assortment, so we're gonna tweak that and move that around. We weren't happy. We didn't have enough space for some of the meals that I was talking about, so we're gonna have to put some new cabinets in to do that. It's interesting how the plant-based meat world just went crazy, and we got behind it. We probably overdid that a little bit in terms of the kind of meat replacement products that was on fire for a while. We're gonna cut that back and be much more about plant-based in a different sort of way. Our dairy space wasn't quite the way we wanted to do, so we're tweaking things, but by and large, we're happy with the assortment.
In fact, which is what I mean by both points of what you said, happy with what we're doing, but there's some tweaks always we're gonna make to go forward to the next stage.
Fantastic. Then let's wrap up one last one on e-commerce. Currently, you guys are north of 11% on e-commerce penetration, which interestingly enough, I mean, that's higher than some of your conventional competitors who have been spending a lot more on e-commerce.
Indeed
Than you guys have been.
We've spent nothing on it, so.
Pretty good return right there. How do you think about your capacity overall to boost online penetration further from here? I mean, do you reach a penetration level where it becomes disruptive to the in-store shopper? Do you think you're gonna have to, at some point, invest in automation areas like micro-fulfillment just because you've been so successful on that front?
I think one, we're gonna go where the customer wants, right?
Sure. Yeah.
If the customer wants to do that and shop more that way, we're gonna continue to fulfill that way. We have a great relationship with our partners. We now have two instead of just one. We had a great relationship before. They've done a really fine job for us. Is it disruptive? They're actually, Our associates in the stores, they're fine with them. They do a really nice job. We don't see that being disruptive in the stores. There are many fulfillment centers, and, you know, they fill both needs, so I don't think it changes. Where is the end point? Who knows? You know, is it gonna be 15? Is it gonna be 20? Is it gonna stay at 11? Who knows? We're gonna go where the customer is and provide that service.
Just to reinforce that, we'll go where the customer takes us. When I took this job, I thought e-com would not grow the way it has grown in our business 'cause it's an experiential thing. As I've evolved through this is truly an omnichannel business that reflects. If you're interested in the health and the food that you're buying, it's an omnichannel solution, whether it be in the store, whether it be pickup, or whether it be delivered to. Using our partners, I think has been the right thing to do 'cause it's quite an expensive investment to try and create the infrastructure for yourselves. Ultimately, as Chip said, it's about evolving with the customer, and that's kind of what we've done, and that's what we'll continue to do in this space, and it'll be what it'll be.
By far the most economical or highest return on your investment to go acquire new customers in our space is still to build new stores.
Yes.
Makes sense. I think that's a good spot to wrap. Jack, Chip, thank you guys so much for putting this together. Really appreciate it. Thank you for everyone in the audience for joining us today, and hope you have a great rest of the day.
Thanks very much, Mark. Appreciate it.
Thanks very much, Mark.
Thank you.